Monthly Business Survey – February 2015

The RBA’s 25bp cut to interest rates in February did not appear to have the desired effect on firms ‘animal spirits’, with confidence actually deteriorating in the month. The index is now at its lowest level since before the Federal election in 2013 and is well below the long run average.

The RBA’s 25bp cut to interest rates in February did not appear to have the desired effect on firms ‘animal spirits’, with confidence actually deteriorating in the month. The index is now at its lowest level since before the Federal election in 2013 and is well below the long run average. The fall was relatively broad based, suggesting common factors such as political and economic uncertainty, are driving this result. Mining and retail reported the largest decline, while manufacturing and wholesale were the only industries to report a rise in confidence (although both remain soft).

Business conditions were unchanged in February, with each of the components (trading, profit, employment) holding broadly steady – the employment index improved only marginally. This level of conditions is pointing to below trend rates of activity. By industry, manufacturing and construction improved the most, more than unwinding a surprise drop in construction last month to be in positive territory again. In contrast, mining dropped sharply in line with weaker commodity markets and less favourable movements in the AUD. Orders were up (albeit still soft), as is capacity utilisation, which is helping support reasonable levels of non-mining capex (although recent ABS data raises questions over the longer-term outlook). In contrast, the ‘bellwether’ wholesale industry weakened even further.

Implications for NAB forecasts (See latest Global and Australian Forecasts report also released today):

Global growth remains around 3% and, although the business surveys show a lift in sentiment in key advanced economies, there is still no clear evidence that the expected upturn in global growth to 3½% by the end of the year has commenced. Weaker prices for oil and other commodities will benefit spending power in most big advanced economies as well as in China, but that same weakness is weighing on demand across a range of primary exporting nations. World trade remains sluggish, holding down growth in export-oriented areas like East Asia but the lower Euro should help towards its predicted recovery in growth.

Locally, we have not changed our near term forecasts – 2014/15 at 2.3% – and have marginally lowered 2015/16 forecasts to 3% (was 3.2%). That largely reflects weaker business investment and a touch higher unemployment rate (6.7%) at end 2015 and hence a touch weaker consumption. On going weak global trade has lowered our expectations of much better non commodity exports. The domestic economy, in early 2015, has not gained momentum and indeed business confidence is lower. Inflation will continue to slow. We still see another rate cut in coming months – most likely May but the April meeting is live and data dependent. We are not forecasting a second cut to below 2% but the chances of that happening are rising (35-40% chance). We see rate rises starting again in H2 2016.